Currency Options

• Protect against adverse movements in foreign exchange rates
• Benefit should spot exchange rates move favourably
• Protect a budget exchange rate as you choose the rate under the option
• Flexibility if the currency amount is uncertain

Currency options give the holder of the option the right but not the obligation to buy or sell a specific amount of currency, at a specific rate of exchange, on or before a specific future date. There are many different types of currency options but only standard currency options are covered here.

A forward contract provides protection, but you are obliged to deal, and at a specific rate. Therefore your company is not in a position to take advantage of favourable movements in rates between booking the contract and completing the deal; nor can you avoid your obligation should your underlying commercial exposure disappear.

• Certainty
  Once you have specified the details of the option to us, and paid the premium, you know for certain the worst rate at which you will be able to buy or sell your currency.
• Flexibility
  Flexibility If the spot market rate or forward contract rate improves at any time up to the expiry date of the option, you can simply deal in that market and ignore the option. If your need to buy or sell the currency changes - say because an order has been unexpectedly cancelled - again, you can simply let the option lapse.
  
  Example - today you are ordering raw materials from the US, which you need to pay for in six months time. You are therefore looking to buy dollars from us to meet the invoice. You specify that you would like to buy dollars at a worst rate of USD1 = S$1.80.

You need to advise us of You need to provide the following details:

• the amount and currencies involved
• the rate at which you would like to buy or sell the currency or the strike price
• the expiry date, and
• whether you would like to exercise the option only on the expiry date or at any time up to the expiry date

The cost of an option is similar to the payment of an insurance premium. It will depend upon a number of factors, including

• The volatility of the two currencies
• The rate you specify you would like to deal at under the option or the strike price
• The period of the option